On August 30, Eni announced a historic natural gas discovery in the Eastern Mediterranean, off the coast of Egypt. The “Zohr” Prospect, Eni believes, could hold 30 trillion cubic feet of natural gas (5.5 billion barrels of oil equivalent), a discovery that may end up being the largest in the history of both Egypt and the Mediterranean Sea as a whole.

The Zohr discovery could have large ramifications for Egypt’s domestic energy situation, regional energy production and exports, and even global gas markets.

The Zohr discovery is not only significant for the Italian oil company. It could also have large ramifications for Egypt’s domestic energy situation, regional energy production and exports, and even global gas markets.

Gas for Egypt

The Eni discovery came at an opportune time for gas-starved Egypt. The country’s economy has suffered through electricity blackouts as a result of domestic gas production declining for more than half a decade. The problems are mostly due to regulated gas markets in Egypt—the price the Egyptian government has paid private companies has been insufficiently low to incentivize production. Gas fields matured while lackluster investment failed to stem the decline. Meanwhile, gas demand continues to rise, growing by an average of 7 percent between 2004 and 2013.

To make matters worse, the Egyptian government fell behind in payments that it owed to private companies. In an effort to remedy this situation, the government made several payments earlier this year to international oil and gas companies to settle some overdue debts with the intention of clearing hurdles for future investment and the development of new gas fields.

In January 2015, the government paid $350 million to BG Group, which accounted for about a quarter of the debt owed to the company. A few days later, the government sent $60 million to Dana Gas, slashing its outstanding obligations by one-third. In the same month, Circle Oil received $15 million. By clearing away these debts, the government hopes to improve its reputation so it doesn’t scare away investors.

However, even if new investment is forthcoming, immediate shortages of gas supplies have forced Egypt—once a net natural gas exporter—to turn to costly imports. Last year, Egypt reached a deal with Norway’s Hoegh LNG that would provide Egypt with a floating storage and regasification unit (FSRU) for five years, opening up the door to expanded imports of LNG.

The Egyptian government signed a flurry of follow-up deals. In December 2014, for instance, Egypt inked a deal with Algeria for six LNG cargoes. Then came a January 2015 deal with Royal Dutch Shell for 1 million tons per year (mtpa) of LNG. Egypt didn’t stop there. It signed a five-year agreement with Gazprom that will lead to 35 shipments of LNG imports. The first arrived in August. Egypt’s state gas company EGAS also signed a deal with Russia’s Rosneft in July, which calls for 24 LNG shipments to Egypt spread out over two years, beginning in late 2015.

Egypt was facing a future of steep import bills to meet natural gas needs, but that could all change if Eni’s new discovery lives up to the hype.

In short, Egypt was facing a future of steep import bills to meet natural gas needs, but that could all change if Eni’s new discovery lives up to the hype. The Zohr Prospect, once developed, could provide enough gas to meet Egypt’s domestic needs for decades, the Italian oil company insists. Estimates put the field’s production capability at 2.5 billion to 3 billion cubic feet per day. That level would likely ease most of Egypt’s gas deficit.

Eni is prioritizing the development of Zohr. Although it has not made a final investment decision, the company says that it “will immediately appraise the field with the aim of accelerating a fast track development.” Eni’s CEO Claudio Descalzi recently flew to Cairo to meet with Egyptian President Abdel Fattah al-Sisi to report the good news. Drilling could begin in 2016, with production potentially starting up two years later.

Israeli Gas Takes a Back Seat

The significance of the Zohr discovery is not confined to Egypt. Just north of Eni’s new discovery is a massive pool of gas in Israel that was supposed to transform the region. Houston-based Noble Energy discovered the Tamar gas field in 2009 and followed that up with an even more impressive discovery in the Leviathan field in 2010. Located in Israeli waters, the two gas fields have fueled speculation that Israel could meet all of its domestic gas needs and also become a major gas exporter in the region. In fact, Israel hoped that Egypt would be an important export market for Israeli gas.

But Eni just upended the ambitious plans that Noble Energy, and the Israeli government, had in store. If Eni is successful, Egypt will not need Israeli gas, and Eni could compete with Noble for gas exports. In fact, Eni could have the larger resource base: The Zohr could hold about one-third more gas than the Leviathan, which until last week was the region’s largest gas field.

Moreover, with Eni voicing optimism for immediate development, Egypt could actually become a major gas player faster than Israel. The Israeli government, concerned that Noble Energy and its partner Delek Group owned too much of the country’s gas reserves, has scrutinized the consortium and forced it to sell off assets. Although the Israeli government and the companies recently reached a resolution, the standoff has severely delayed development. Eni, and Egypt, could beat its neighbors to the punch.

As a result, the Zohr discovery may prompt a rethink for outlets for Israeli gas. If Israeli’s domestic market can’t soak up enough of the gas—along with Jordan and the Palestinian territories—Noble might be forced to look elsewhere. The EU has showed interest in a long-distance pipeline that has so far appeared unviable. But with the potential loss of the Egyptian market, the gas will need to go somewhere else, so export plans that once appeared far-fetched may get another look.

LNG Markets

For now, gas from the Zohr Prospect will be dedicated to Egyptian consumers. “All the gas from this field will be allocated to the internal market. Eni has agreed to that,” Khaled Abdel Badie, chairman of Egyptian Natural Gas Holding Company, told Bloomberg in a September 1 interview.

The possibility of Egypt becoming a gas exporter is speculative at this point, and is most likely predicated on further gas discoveries. But if Egypt were to become an LNG exporter, its volumes would add to regional and global supplies, pushing down prices. That would dim the prospects of other LNG producers around the world which are currently weighing final investment decisions, such as those in East Africa.

At a minimum, gas exporters in Algeria, Russia, and Qatar could soon lose a major customer as Egypt produces enough gas to meet domestic demand. Even if Egypt doesn’t export, more LNG cargoes from these exporters would be freed up, putting downward pressure on LNG prices in regional markets.

East Med a Major Source of Gas Supply

The Eastern Mediterranean is quickly becoming a major source of natural gas supply.

Of course, all of these shifts are hypothetical at this point. Eni still needs to prove that it can develop their find at the levels it claims possible. Until then, Egypt will continue to need large volumes of LNG to keep blackouts from occurring.

However, just as the discovery of the Leviathan prompted predictions of a regional transformation, the same could be said of the Zohr discovery. The Eastern Mediterranean could be rapidly emerging as a major source of natural gas supply, but it also has major hurdles to overcome to realize this potential.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.